AMCON DISTRIBUTING CO - Annual Report: 2009 (Form 10-K)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

 

 

 

 

Commission File Number 1-15589

 

 

 

 

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(402) 331-3727

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value

 

 

 

 

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on March 31, 2009 was $8,581,881, computed by reference to the $25.01 closing price of such common stock equity on March 31, 2009.

 

As of November 2, 2009 there were 573,232 shares of common stock outstanding.

 

Portions of the following document are incorporated by reference into the indicated parts of this report: definitive proxy statement for the 2010 annual meeting of stockholders to be filed with the Commission pursuant to Regulation 14A - Part III.

 

 

AMCON DISTRIBUTING COMPANY

 

Table of Contents

 

PART I

 

For purposes of this report, unless the context indicates otherwise, all references to “we,” “us,” “our,” “Company,” and “AMCON” shall mean AMCON Distributing Company and its subsidiaries. The wholesale distribution segment of our Company will be separately referred to as “ADC.” The Retail Health Food Segment of our Company will be separately referred to as “Retail”.

 

The Company’s 2009 and 2008 fiscal years ended September 30, are herein referred to as fiscal 2009 and fiscal 2008, respectively. The fiscal year-end balance sheet dates of September 30, 2009 and September 30, 2008 are referred to herein as September 2009 and September 2008, respectively.

 

This report and the documents incorporated by reference herein, if any, contain forward looking statements, which are inherently subject to risks and uncertainties. See “Forward Looking Statements” under Item 7 of this report.

 

 

COMPANY OVERVIEW

 

AMCON Distributing Company was incorporated in Delaware in 1986 and our common stock is listed on NYSE Amex Equities (formerly the American Stock Exchange) under the symbol “DIT.” The Company operates two business segments:

 

 

WHOLESALE DISTRIBUTION SEGMENT

 

ADC serves approximately 4,200 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. In November 2008, Convenience Store News ranked ADC as the eighth (8th) largest convenience store distributor in the United States based on annual sales.

 

ADC distributes approximately 14,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food service products.

 

ADC operates five distribution centers located in Illinois, Missouri, Nebraska, North Dakota and South Dakota. These distribution centers, combined with two cross-dock facilities, contain a total of approximately 487,000 square feet of floor space. ADC’s principal suppliers include Philip Morris USA, RJ Reynolds Tobacco, Proctor & Gamble, Hershey, Mars, Quaker, and Nabisco. ADC also markets private label lines of tobacco, snuff, water, candy products, batteries, film, and other products. ADC does not maintain any long-term purchase contracts with these suppliers.

 

RETAIL HEALTH FOOD SEGMENT

 

The Company’s retail health food stores, which are operated as Chamberlin’s Market & Café (“Chamberlin’s” or “CNF”) and Akin’s Natural Foods Market (“Akin’s” or “ANF”), carry over 30,000 different national and regionally branded and private label products. These products include high-quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise. Chamberlin’s, which was first established in 1935, operates six stores in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of seven locations in Oklahoma, Nebraska, Missouri, and Kansas.

The retail health food industry has significantly grown over the past decade as the demand for non-processed natural products (pesticide-free, hormone-free, and non-genetically modified) has grown. We believe this growth is attributable to a number of factors, including:

 

 

COMPETITIVE STRENGTHS

 

We believe that we benefit from a number of competitive strengths, including the following:

 

Industry Experience

 

The management teams for both of our business segments include substantial depth in the areas of logistics, sales, and marketing. This experience is beneficial for the management of vendor and customer relationships as well as overall operational execution.

 

Flexible Distribution Capabilities and Customer Service Programs

 

The size and flexibility of ADC’s distribution operations strategically position it to service a broad range of customers from independent retail outlets to large multi-location retailers. Our customized customer service programs assist our customers in maximizing vendor promotions and by providing access to private label and custom food services, store layout and design consultation, and overall profitability consulting, all of which have proven particularly popular.

 

Unique Product Selection

 

Our retail health foods segment prides itself in carrying a unique and superior-quality selection of natural food products and vitamin supplements, which cannot be found in many mainstream retail outlets. Our unique product set, combined with highly trained and knowledgeable in-store associates, has created a loyal customer following in which our stores are sought out destinations, providing a personalized shopping experience.

 

BUSINESS STRATEGY

 

We have a three-pronged business strategy to drive growth and create shareholder value in which we seek to:

 

 

To execute against this strategy, the Company has rigorous operational processes in place that are designed to control costs, manage credit risk, and monitor inventory levels, providing the business with maximum liquidity. The success of our strategy ultimately resides on our continued ability to provide our customers with unmatched service, unique product offerings, and leading edge technologies.

 

PRINCIPAL PRODUCTS

 

Sales of cigarettes represented 71% and 70% of the Company’s consolidated revenue in fiscal 2009 and fiscal 2008, respectively. Sales of candy, beverages, food service, groceries, health food products, paper products, health and beauty care products, and tobacco products represented approximately 29% and 30% of consolidated revenue in fiscal 2009 and fiscal 2008, respectively.

DIVESTITURES

 

As discussed further in Note 2 to the Consolidated Financial Statements included in this Annual Report, in May 2009 Trinity Springs, Inc. (“TSI”), a wholly owned subsidiary and former component of the Company’s beverage segment, completed the sale of its operating assets.

 

INFORMATION ON SEGMENTS

 

Information about our segments is presented in Note 15 to the Consolidated Financial Statements included in this Annual Report.

 

COMPETITION — Wholesale Distribution Segment

 

ADC is one of the largest distribution companies of its kind within the regions in which we operate. However, there are a number of both small and large wholesale distributors operating in the same geographical regions as ADC, resulting in a highly competitive marketplace. ADC’s principal competitors are national wholesalers such as McLane Co., Inc. (Temple, Texas) and Core-Mark International (San Francisco, California), as well as regional wholesalers such as Eby-Brown LLP (Chicago, Illinois) and Farner-Bocken (Carroll, Iowa), along with a host of smaller grocery and tobacco wholesalers.

 

Competition within the industry is based primarily on the range and quality of the services provided, pricing, variety of products offered, and the reliability of deliveries. Our larger competitors principally compete on pricing and breadth of product offerings, while our smaller competitors focus on customer service and their delivery arrangements.

 

ADC believes its business model is uniquely positioned to compete with a wide range of competitors including national, regional, and local wholesalers. As the eighth (8th) largest convenience store distributor in the United States based on annual sales (according to Convenience Store News), ADC has sufficient economies of scale to offer competitive pricing as compared to national wholesalers, while its flexible distribution and support model allows it to provide superior customer service and customized merchandising solutions, which have proven particularly attractive to our smaller customers.

 

COMPETITION — Retail Health Food Segment

 

The natural food retail industry is highly fragmented, with more than 12,000 stores operating independently or as part of small retail chains. Whole Foods Market, a large natural food chain that we compete with, continues to expand through new store openings and acquisitions. Additionally, conventional supermarkets and mass market outlets are increasing their emphasis on the sale of natural food products.

 

SEASONALITY

 

Sales in the wholesale distribution industry are somewhat seasonal and tend to be higher in warm weather months during which our convenience store customers experience increased customer traffic. The warm weather months generally fall within the Company’s third and fourth fiscal quarters. Our retail health food business does not generally experience significant seasonal fluctuations in its business.

 

GOVERNMENT REGULATION

 

The Company is subject to regulation by federal, state and local governmental agencies, including the U.S. Department of Agriculture, the U.S. Food and Drug Administration (“FDA”), the Occupational Safety and Health Administration (“OSHA”), and the U.S. Department of Transportation. These regulatory agencies generally impose standards for product quality and sanitation, workplace safety, and security and distribution policies.

 

The Company is also subject to state regulations related to the distribution and sale of cigarettes and tobacco products, generally in the form of licensing and bonding requirements. Additionally, both state and federal regulatory agencies have the ability to impose excise taxes on cigarette and tobacco products. During fiscal 2009, a number of states as well as the federal government, increased the excise taxes levied on cigarettes and tobacco

products. We expect this trend to continue as legislators look for alternatives to fund budget shortfalls among other considerations.

 

ENVIRONMENTAL MATTERS

 

All of the Company’s facilities and operations are subject to state and federal environmental regulations. The Company believes it is in compliance with all such regulations and is not aware of any violations that could have a material adverse effect on its financial condition or results of operations. Further, the Company has not been notified by any governmental authority of any potential liability or other claim in connection with any of its properties. The costs and effect on the Company to comply with state and federal environmental regulations were not significant in either fiscal 2009 or fiscal 2008.

 

EMPLOYEES

 

At September 2009, the Company had 678 full-time and 123 part-time employees in the following areas:

 

 

All of ADC’s delivery employees in the Quincy, Illinois distribution center, representing approximately 4% of employees company-wide, are represented by the International Association of Machinists and Aerospace Workers. The current labor agreement with the union is effective through December 2011.

 

CORPORATE AND AVAILABLE INFORMATION

 

The Company’s principal executive offices are located at 7405 Irvington Road, Omaha, Nebraska 68122. The telephone number at that address is 402-331-3727 and our website address is www.amcon.com. We provide free access to the various reports we file with the United States Securities and Exchange Commission through our website. These reports include, but are not limited to, our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. Please note that any internet addresses provided in this report are for information purposes only and are not intended to be hyperlinks. Accordingly, no information found and/or provided at such internet addresses is intended or deemed to be incorporated by reference herein.

 

You may also read and copy any materials we file with the Commission at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549 on official business days during the hours of 10:00 a.m. to 3:00 p.m. You can get information about the Public Reference Room by calling 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov which contains reports, proxies and other company information.

 

 

IN GENERAL

 

You should carefully consider the risks described below before making an investment decision concerning our securities. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

 

If any of the following risks actually materializes, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our common stock could decline substantially. This Annual Report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including the risks described below and elsewhere in this Annual Report. See “Forward Looking Statements” under Item 7 of this report for a discussion of forward looking statements.

RISK FACTORS RELATED TO THE WHOLESALE BUSINESS

 

 

In June 2009, legislation was signed into law which provided the FDA with broad new authority to regulate the manufacture, distribution, and sale of cigarette and tobacco products. While we believe most of the new regulatory burden will fall upon product manufacturers, the FDA may also impose new regulations on wholesale distributors. In one of its first major regulatory actions, the FDA banned the manufacture, shipment, and sale of certain flavored cigarettes effective September 22, 2009.

 

If the FDA were to impose additional regulations and we could not comply with such regulations, we could face remedial actions such as fines, suspension of product distribution rights, and/or termination of operations. Further, if the FDA were to expand product bans our future revenue stream could materially decrease. If any of these items were to occur, our results from operations, cash flow, business, and overall financial condition could be negatively impacted.

 

 

The distribution of cigarettes represents a significant portion of our business. During fiscal 2009, approximately 71% of our consolidated revenues came from the distribution of cigarettes which generated approximately 27% of our consolidated gross profit. Due to manufacturer price increases, restrictions on advertising and promotions, regulation, higher excise taxes, health concerns, smoking bans, and other factors, the demand for cigarettes in the United States may continue to decline. If this occurs, our results from operations, cash flow, business, and overall financial condition could be negatively impacted.

 

 

Cigarette and tobacco products are subject to substantial excise taxes. Significant increases in cigarette-related taxes and/or fees have been imposed by both individual states and the federal government. Most recently (April 2009), the federal excise taxes imposed on cigarette and tobacco products was increased dramatically. The new regulatory responsibilities of the FDA may be also be funded by further increases in federal excise taxes.

 

Increases in excise taxes may reduce the long-term demand for cigarette and tobacco products and/or result in a sales shift from higher margin premium cigarette and tobacco products to lower margin deep-discount brands, while at the same time increasing the Company’s accounts receivable risk and inventory carrying costs. If any of these events were to occur, our results from operations, cash flow, liquidity position, and overall financial condition could be negatively impacted.

 

 

Continued divestitures and consolidations within the convenience store industry reflect a trend that may result in customer losses for us if the acquiring entity is served by another wholesale distributor or we are unable to retain the business. If we were to lose a substantial volume of business because of these trends, our results from operations, cash flow, business, and overall financial condition could be negatively impacted.

 

 

Increases in fuel prices can and do have a negative impact on our profit margins. If fuel prices increase and we are not able to meaningfully pass on these costs to customers, it could adversely impact our results of operations, business, cash flow, and financial condition.

 

 

We receive payments from the manufacturers of the products we distribute including allowances, discounts, volume rebates, and other merchandising incentives in connection with various incentive programs. In addition, we receive

discounts from states in connection with the purchase of excise stamps for cigarettes. If the manufacturers or states change or discontinue these programs or we are unable to maintain the volume of our sales, our results of operations, business, cash flow, and financial condition could be negatively affected.

 

 

The wholesale distribution industry is highly competitive. There are many distribution companies operating in the same geographical regions as ADC. ADC’s principal competitors are national and regional wholesalers, along with a host of smaller grocery and tobacco wholesalers. Most of these competitors generally offer a wide range of products at prices comparable to ADC’s. Some of our competitors have substantial financial resources and long-standing customer relationships. Heightened competition may reduce our margins and adversely affect our business. If we fail to successfully respond to these competitive pressures or to implement our strategies effectively, we may lose market share and our results of operations, business, cash flow, and financial condition could suffer.

 

 

Increased selling prices and higher cigarette taxes have resulted in the growth of deep-discount cigarette brands. Deep-discount brands are brands generally manufactured by companies that are not original participants to the master settlement agreement, and accordingly, do not have cost structures burdened with master settlement agreement related payments to the same extent as the original participating manufacturers. Since the master settlement agreement was signed in November 1998, the category of deep-discount brands manufactured by smaller manufacturers or supplied by importers has grown substantially.

 

 

In connection with the master settlement agreement, we are indemnified by the tobacco product manufacturers from which we purchase cigarettes and other tobacco products for liabilities arising from the sale of the tobacco products that they supply to us. However, if litigation challenging the validity of the master settlement agreement were to be successful and all or part of the master settlement agreement is invalidated, we could be subject to substantial litigation due to the sales of cigarettes and other tobacco products, and we may not be indemnified for such costs by the tobacco product manufacturers in the future. In addition, even if we continue to be indemnified by cigarette manufacturers that are parties to the master settlement agreement, future litigation awards against such cigarette manufacturers could be so large as to eliminate the ability of the manufacturers to satisfy their indemnification obligations. Our results of operations, business, cash flow, and overall financial condition could be negatively impacted due to increased litigation costs and potential adverse rulings against us.

 

RISK FACTORS RELATED TO THE RETAIL BUSINESS

 

 

In the retail health food business, our primary competitors currently include national natural foods supermarkets, such as Whole Foods Market, specialty supermarkets, regional natural foods stores, small specialty stores, and restaurants. In addition, conventional supermarkets and mass market outlets are increasing their emphasis on the sale of natural products. Some of these potential competitors may have greater financial or marketing resources than we do and may be able to devote greater resources to sourcing, promoting, and selling their products. Increased competition may have an adverse effect on our results of operations, business, cash flow, and financial condition as the result of lower sales, lower gross profits and/or greater operating costs such as marketing.

 

 

Our expansion strategy is dependent on finding suitable locations, and we face intense competition from other retailers for such sites. We also need to be able to open new stores timely and operate them successfully. In addition, our success is dependant on our ability to hire, train and integrate new qualified team members. Our success is also dependent on our ability to adapt our distribution, management information and other operating systems to

adequately supply products to new stores at competitive prices so that we can operate the stores in a successful and profitable manner. If we are not able to find and open new store locations and close poor performing stores, this could have a material adverse impact on our results of operations, business, cash flow, and overall financial condition.

 

 

There is no assurance that quality natural and organic products including dietary supplements, fresh and processed foods and vitamins will be available to meet our future needs. If conventional supermarkets increase their natural and organic product offerings or if new laws require the reformulation of certain products to meet tougher standards, the supply of these products may be constrained. Any significant disruption in the supply of quality natural and organic products could have a materially adverse impact on our overall sales and product costs.

 

 

We believe our stores more heavily emphasize perishable products than conventional supermarket stores. The Company’s emphasis on perishable products may result in significant product inventory losses in the event of extended power outages, natural disasters or other catastrophic occurrences.

 

RISK FACTORS RELATED TO THE OVERALL BUSINESS

 

 

Our results of operations and financial condition are particularly sensitive to changes in the overall economy, including the level of consumer spending. Further changes in discretionary spending patterns may decrease demand from our convenience store customers and/or impact the demand for natural food products in our retail health food stores as customers purchase cheaper product alternatives.

 

Additionally, many of our wholesale segment customers are thinly capitalized and their access to credit in the current business environment may be impacted by their ability to operate as a going concern, presenting additional credit risk for the Company. If the economic downturn persists or deteriorates further, it may result in lower sales and profitability as well as customer credit defaults.

 

 

The acquisition of existing stores, the opening of new retail stores, and the development of new production and distribution facilities requires significant amounts of capital. In the past, our growth has been funded primarily through proceeds from bank debt, private placements of equity and debt and internally generated cash flow. These and other sources of capital may not be available to us in the future, which could impair our ability to further expand our business.

 

 

Our revolving credit facility imposes restrictions on us that could increase our vulnerability to general adverse economic and industry conditions by limiting our flexibility in planning for and reacting to changes in our business and industry. Specifically, these restrictions limit our ability, among other things, to incur additional indebtedness, make distributions, pay dividends, issue stock of subsidiaries, make investments, repurchase stock, create liens, enter into transactions with affiliates, merge or consolidate, or transfer and sell our assets.

 

 

Under our credit facility, we are required to meet certain financial ratios and tests. Our ability to comply with these covenants may be affected by factors beyond our control. If we breach, or if our lender contends that we have breached, any of these covenants or restrictions, it could result in an event of default under our revolving credit facility, which would permit our lenders to declare all amounts outstanding thereunder to be immediately due and payable, and our lenders under our revolving credit facility could terminate their commitments to make further extensions of credit under our revolving credit facility.

 

We expect that our principal sources of funds will be cash generated from our operations and if necessary, borrowings under our revolving credit facility. However, the current and future conditions in the credit markets may impact the availability of capital resources required to meet our future financial obligations, or to provide funds for our working capital, capital expenditures and other needs for the foreseeable future. We may require additional equity or debt financing to meet our working capital requirements or to fund our capital expenditures. We may not be able to obtain financing on terms satisfactory to us, or at all.

 

 

We do not have any long-term contracts with our suppliers committing them to provide products to us. Although our purchasing volume can provide leverage when dealing with suppliers, suppliers may not provide the products we sell in the quantities we request or on favorable terms. Because we do not control the actual production of the products we sell, we are also subject to delays caused by interruption in production based on conditions beyond our control. These conditions include job actions or strikes by employees of suppliers, inclement weather, transportation interruptions, and natural disasters or other catastrophic events. Our inability to obtain adequate supplies of the products we sell as a result of any of the foregoing factors or otherwise, could cause us to fail to meet our obligations to our customers.

 

 

We may face exposure to product liability claims in the event that the use of products sold by us is alleged to cause injury or illness. With respect to product liability claims, we believe that we have sufficient liability insurance coverage and indemnities from manufacturers. However, product liability insurance may not continue to be available at a reasonable cost, or, if available, may not be adequate to cover all of our liabilities. We generally seek contractual indemnification and insurance coverage from parties supplying the products we sell, but this indemnification or insurance coverage is limited, as a practical matter, to the creditworthiness of the indemnifying party and the insurance limits of any insurance provided by suppliers. If we do not have adequate insurance or if contractual indemnification is not available or if the counterparty cannot fulfill its indemnification obligation, product liability relating to allegedly defective products could materially adversely impact our results of operations, business, cash flow, and overall financial condition.

 

 

We depend on the continued services and performance of our senior management and other key personnel, particularly Christopher H. Atayan, AMCON’s Chief Executive Officer and Chairman of the Board, and Andrew C. Plummer, AMCON’s Chief Financial Officer and Vice President. While we maintain key person life insurance policies and have employment agreements with certain key personnel, the loss of service from any of our executive officers or key employees could harm our business.

 

 

We compete with other businesses in each of our markets with respect to attracting and retaining qualified employees. A shortage of qualified employees could require us to enhance our wage and benefits packages in order to compete effectively in the hiring and retention of qualified employees or to hire more expensive temporary employees.

 

In addition, at September 2009 approximately 4% or approximately thirty employees were covered by a collective bargaining agreement with a labor organization, which expires in December 2011. If we were not able to renew our future labor agreements on similar terms, we may be unable to recover labor cost increases through increased prices or may suffer business interruptions as a result of strikes or other work stoppages.

 

As a distributor and retailer of food products, we are subject to the regulation by the U.S. Food and Drug Administration (“FDA”). Our operations are also subject to regulation by the Occupational Safety and Health Administration (“OSHA”), the Department of Transportation and other federal, state and local agencies. Each of these regulatory authorities have broad administrative powers with respect to our operations. If we fail to adequately comply with government regulations or regulations become more stringent, we could experience increased inspections, regulatory authorities could take remedial action including imposing fines or shutting down our operations or we could be subject to increased audit and compliance costs. If any of these events were to occur, our results of operations, business, cash flow, and financial condition would be adversely affected.

 

We cannot predict the impact that future laws, regulations, interpretations or applications, the effect of additional government regulations or administrative orders, when and if promulgated, or disparate federal, state and local regulatory schemes would have on our business in the future. They could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling and/or scientific substantiation. While we do not manufacture any products, any of the aforementioned items could disrupt the supply levels of inventory that we sell. Any or all of such requirements could have an adverse effect on our results of operations, business, cash flow, and financial condition.

 

RISK FACTORS RELATED TO OUR COMMON STOCK

 

 

If the number of owners of record (including direct participants in the Depository Trust Company) of our common stock falls below 300, our obligations to file reports under the Securities Exchange Act of 1934 could be suspended. If we take advantage of this right we will likely reduce administrative costs of complying with public company rules, but periodic and current information updates about the Company would not be available to investors. In addition, the common stock of the Company would be removed from listing on NYSE Amex Equities. This would likely impact investors’ ability to trade in our common stock.

 

 

Various provisions of our bylaws and of corporate law may discourage, delay or prevent a change in control or takeover attempt of our company by a third party that is opposed by our management and Board of Directors. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change of control or change in our management and Board of Directors. These provisions include:

 

 

 

Not applicable.

 

 

The location and approximate square footage of the Company’s five distribution centers and thirteen retail stores at September 2009 are set forth below:

 

 

Our Quincy, Illinois, Bismarck, North Dakota and Rapid City, South Dakota distribution facilities are owned by ADC. Our Quincy, Bismarck and Rapid City distribution centers are subject to first mortgages by Marshall & Ilsley Bank (“M&I”). The Company leases its remaining distribution facilities, retail stores, offices, and certain equipment under noncancellable operating and capital leases. Management believes that its existing facilities are adequate for the Company’s present level of operations, however, larger facilities and additional cross-dock facilities and retail stores may be required if the Company experiences growth in certain market areas.

 

 

None.

 

 

There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 2009.

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

Executive officers of our Company are appointed by the Board of Directors and serve at the discretion of the Board. The following table sets forth certain information with respect to all executive officers of our Company.

 

 

CHRISTOPHER H. ATAYAN has served as the Company’s Chairman of the Board since January 2008, its Chief Executive Officer since October 2006, and has been a director of the Company since 2004. From March 2006 to October 2006, he served the Company in various capacities including Vice Chairman and Chief Corporate Officer. Mr. Atayan is also a consultant to Draupnir LLC (the parent of Draupnir Capital, LLC.), has served as the Senior Managing Director of Slusser Associates, a private equity and investment banking firm, since 1988, and has been engaged in private equity and investment banking since 1982.

 

KATHLEEN M. EVANS has been President of the Company since 1991. Prior to that time, Ms. Evans served as Vice President of the AMCON Corporation (the former parent of the Company) from 1985 to 1991. From 1978 to 1985, Ms. Evans acted in various capacities with AMCON Corporation and its operating subsidiaries.

 

ANDREW C. PLUMMER has served as the Company’s Chief Financial Officer and Secretary since January 2007. From 2004 to 2007, Mr. Plummer served the Company in various roles including Acting Chief Financial Officer, Corporate Controller, and Manager of SEC Compliance. Prior to joining AMCON in 2004, Mr. Plummer practiced public accounting, primarily with the accounting firm Deloitte and Touche, LLP.

PHILIP E. CAMPBELL has served as the Senior Vice President of Planning and Compliance for the Company since January 2007 and has provided consulting services for the Company since 2004. Prior to that time, Mr. Campbell held senior management roles in a number of companies including Franchise Concepts, Inc. where he served as Chief Financial Officer from 2001 to 2004.

 

Although not an executive officer of our Company, Eric. J. Hinkefent is an executive officer of two of our subsidiaries. His business experience is as follows:

 

ERIC J. HINKEFENT has served as President of both Chamberlin’s Natural Foods, Inc. and Health Food Associates, Inc. since October 2001. Prior to that time, Mr. Hinkefent served as President of Health Food Associates, Inc.

 

 

MARKET FOR COMMON STOCK

 

The Company’s common stock trades on NYSE Amex Equities (formerly the American Stock Exchange) under the trading symbol “DIT”. As of October 26, 2009, the closing stock price was $68.00 and there were 573,228 common shares outstanding. As of that date, the Company had approximately 360 common shareholders of record (including direct participants in the Depository Trust Company). The following table reflects the range of the high and low closing prices per share of the Company’s common stock reported by NYSE Amex Equities for fiscal 2009 and 2008.

 

 

DIVIDEND POLICY

 

On a quarterly basis, the Company’s Board of Directors evaluates the potential declaration of dividend payments on the Company’s common stock. Our dividend policy is intended to return capital to shareholders when it is most appropriate. The Company’s revolving credit facility provides that it may not pay dividends on its common shares in excess of $0.72 per common share on an annual basis.

 

Our Board of Directors could decide to alter our dividend policy or not pay quarterly dividends at any time in the future. Such an action by the Board of Directors could result from, among other reasons, changes in the marketplace, changes in our performance or capital needs, changes in federal income tax laws, disruptions in the capital markets, or other events affecting our business, liquidity or financial position.

 

The Company paid cash dividends of $228,242 or $0.40 per common share, in fiscal 2009, and $90,970 or $0.16 per common share, in fiscal 2008.

 

The Company has Series A and B Convertible Preferred Stock (“Convertible Preferred Stock”) outstanding at September 2009 which are not registered under the Securities and Exchange Act of 1934. The Company paid cash dividends on all series of Convertible Preferred Stock of $347,025 and $419,839 during fiscal 2009 and fiscal 2008, respectively. See Note 3 to Consolidated Financials Statements included in this Annual Report for further information regarding these securities.

 

COMPANY REPURCHASE OF SHARES

 

The Company did not repurchase shares of its common stock during fiscal 2009 or fiscal 2008. As described in the Notes to the Consolidated Financial Statements, on October 27, 2009 the Board of Directors authorized a share repurchase program which provides for the repurchase of up to 50,000 shares of AMCON’s common stock. The shares may be purchased from time to time in open market or in negotiated transactions.

 

EQUITY COMPENSATION PLAN INFORMATION

 

We refer you to Item 12 of this report for the information required by Item 201(d) of SEC Regulation S-K.

 

 

Not applicable.

 

 

Overview

 

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements under Item 8 and other information in this report, including Critical Accounting Policies and Cautionary Information included at the end of this Item 7. The following discussion and analysis includes the results of operations for our continuing operations for the twelve month periods ended September 2009 and September 2008.

 

A separate discussion of our discontinued operations has been presented within this Item 7. Accordingly, the sales, gross profit, selling, general and administrative, depreciation and amortization, direct interest, other expenses, and income tax benefit for discontinued operations have not been included in our analysis of continuing operations. For more information regarding our business segments, see Item 1 “Business” of this Annual Report.

 

Business Update — General

 

Economic conditions continue to impact consumer confidence and discretionary spending patterns across the states in which we operate. Customers in both of our businesses are increasingly value-conscious and price-sensitive. Accordingly, we have undertaken a number of initiatives designed to highlight the value propositions we offer customers in a number of areas such as exclusive product offerings and the delivery of customized technology solutions at competitive prices.

 

Forward looking, we believe that a combination of economic and regulatory factors and the potential of higher fuel prices could adversely affect our sales, gross margins, and operating profits into the foreseeable future. However, we are hopeful that our conservative strategy of cost containment, aggressively targeting new business, and maintaining maximum liquidity, will position us well to capture market share, execute strategic acquisitions and open new retail stores and ultimately increase shareholder value.

 

Business Update — Wholesale Distribution Segment

 

The wholesale distribution industry is mature and continues to be intensely competitive. We expect future sales and profitability will be pressured by a number of prominent trends:

 

Declining revenue streams:  Historically, cigarette and tobacco products have represented one of the largest sales categories for convenience stores and their distributors alike. Recent legislative actions such as excise tax increases, smoking bans, as well as a general decline in the number of smokers in the United States, has decreased demand for these products.

 

In April 2009, significant increases in the federal excise taxes were imposed on cigarette and tobacco products in conjunction with the State Children’s Health Insurance Program law (“SCHIP”). Additionally, in June 2009 new legislation was signed into law which provided the FDA with broad new authority to regulate the manufacture, distribution, marketing, and sale of cigarette and tobacco products. In one of its first major regulatory actions, the FDA banned the manufacture, shipment, and sale of certain flavored cigarettes effective September 22, 2009.

 

On a long-term basis, we believe these factors will reduce the demand for cigarette and tobacco products, while at the same time increasing the Company’s inventory carrying costs and customer credit risk.

 

Gross Profit Erosion:  Efforts to retain and capture market share have prompted aggressive pricing and have resulted in gross profit erosion industry-wide.

We believe the long-term implications of these trends may be detrimental to smaller distributors. A combination of declining revenue streams, gross profit erosion, and limited access to credit and/or new capital may force many distributors from the market, resulting in substantial industry consolidation. As one of the nation’s largest wholesale distributors, we believe the Company is well positioned to capitalize on these trends and expand our strategic footprint.

 

Business Update — Retail Health Food Segment

 

Sales in our retail health food segment have been negatively impacted by weaknesses in both of our geographic markets. In particular, sales in our Florida stores have been hurt by the severe economic downturn in that state, in addition to increased competition from other natural food chains.

 

In the near term, our retail segment faces a challenging operating environment as consumer behavior has been adversely impacted by the recession. In response, we have worked to better align our cost structure to demand, while reemphasizing the value choices found throughout our stores, such as our private label offerings and other product lines unique to our stores.

 

Despite the impact of the recession, we believe the long-term prospects for this segment remain attractive and we will continue to pursue growth through ongoing evaluations of potential new locations. If health food retailers can demonstrate value and provide consumers with affordable choices, we believe overall demand for natural food products will rebound as the current adverse economic conditions dissipate.

 

Significant Events In Fiscal 2009

 

During fiscal 2009, the Company:

 

 

Results of Operations

 

The following table sets forth an analysis of various components of the Company’s Statement of Operations as a percentage of sales for fiscal years 2009 and 2008:

 

 

 

 

 

SALES — Fiscal 2009 vs. Fiscal 2008 (Continuing Operations)

 

Changes in sales are driven by two primary components:

 

(i) changes to selling prices, which are largely controlled by our product suppliers, and state and federal excise taxes imposed on cigarettes and tobacco products; and

 

(ii) changes in the volume of products sold to our customers, either due to a change in purchasing patterns resulting from consumer preferences or the fluctuation in the comparable number of business days in our reporting period.

 

Sales in our wholesale distribution segment increased $50.1 million in fiscal 2009 as compared to fiscal 2008. This change included a $42.3 million increase in cigarette sales and a net $7.8 million increase in sales of tobacco, beverages, snacks, candy, grocery, health & beauty products, automotive, food service, and store supplies categories (“Other Products”).

 

Significant items impacting our fiscal 2009 wholesale segment sales included:

 

 

Sales in our retail health food segment decreased approximately $2.6 million in fiscal 2009 as compared to fiscal 2008. This decrease was primarily related to lower sales volumes in our highly perishable and refrigerated food categories, particularly in our Florida retail stores, which have been impacted by a severe regional economic downturn and increased competition from other natural food chains.

 

GROSS PROFIT — Fiscal 2009 vs. Fiscal 2008 (Continuing Operations)

 

Our gross profit does not include fulfillment costs and costs related to the distribution network which are included in selling, general and administrative costs, and may not be comparable to those of other entities. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for the wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives we receive which are netted against such costs.

 

Gross profit in our wholesale segment increased $4.5 million in fiscal 2009 as compared to the same prior year period. During fiscal 2009, our wholesale gross profit benefitted by approximately $5.8 million primarily due to improved margins resulting from price increases by cigarette and tobacco manufacturers. Offsetting this increase, was $1.3 million decrease in gross profit primarily due to the net impact of lower cigarette carton volumes and changes in both promotional allowances and product mix sold.

 

The Company has benefitted over the past fiscal year from improved profit margins on cigarette and tobacco products. On a long-term basis, however, we believe our gross profit margins will revert back to historical norms based on declining demand trends and competitive pressures industry-wide.

 

Gross profit for the retail health segment decreased $1.0 million in fiscal 2009 as compared to fiscal 2008. This decrease was primarily related to lower sales volume.

 

OPERATING EXPENSE — Fiscal 2009 vs. Fiscal 2008 (Continuing Operations)

 

Operating expense includes selling, general and administrative expenses and depreciation and amortization. Selling, general, and administrative expenses include costs related to our sales, warehouse, delivery and

administrative departments for all segments. Specifically, purchasing and receiving costs, warehousing costs and costs of picking and loading customer orders are all classified as selling, general and administrative expenses. Our most significant expenses relate to employee costs, facility and equipment leases, transportation costs, fuel costs, insurance, and professional fees.

 

Operating expenses decreased approximately $0.3 million in fiscal 2009 as compared to fiscal 2008. Significant items impacting operating expenses included a $1.5 million increase in compensation costs and a $0.4 million increase in health insurance costs. These items were offset by a $1.5 million decrease in fuel costs, a $0.2 million decrease in depreciation expense, and a $0.5 million reduction in other operating expenses.

 

INTEREST EXPENSE — Fiscal 2009 vs. Fiscal 2008 (Continuing Operations)

 

Fiscal 2009 interest expense decreased $1.4 million as compared to fiscal 2008. This change was principally related to lower interest rates and average borrowings on the Company’s credit facility. In fiscal 2009, the Company’s average interest rates and average borrowings on its revolving credit facility were 2.7% and $4.2 million lower, respectively, as compared to fiscal 2008.

 

DISCONTINUED OPERATIONS (Fiscal 2009 vs. Fiscal 2008)

 

In May 2009, Trinity Springs, Inc. (“TSI”), a wholly owned subsidiary and former component of the Company’s beverage segment, and Crystal Paradise Holdings, Inc. (“CPH”) closed a transaction whereby CPH exchanged a $5.0 million note receivable (plus $0.1 million of accrued interest) which it held and was due from TSI, for the operating assets of TSI. The Company will have no continuing involvement in the related operating assets and has recorded a $4.7 million pre-tax gain ($3.0 million after tax) in conjunction with the transaction, which included the recognition of a $1.5 million deferred gain attributable to a previously executed Mutual Release and Settlement Agreement between AMCON, TSI, and CPH. The $4.7 million gain has been reflected in the Statement of Operations as a component of discontinued operations.

 

Simultaneous with the closing of the CPH transaction discussed above, the Company fully settled and satisfied $2.7 million in related party notes payable and accrued interest totaling $0.8 million due from TSI, in exchange for cash payments of approximately $0.8 million. The Company has recorded a $2.7 million pre-tax gain ($1.7 million after tax) related to this transaction, which has been reflected in the Statements of Operations as a component of discontinued operations.

 

A summary of discontinued operations is as follows (dollars in millions):

 

 

Liquidity and Capital Resources

 

OVERVIEW

 

 

Our variability in cash flows from operating activities is dependent on the timing of inventory purchases and seasonal fluctuations. For example, periodically we have inventory “buy-in” opportunities which offer more favorable pricing terms. As a result, we may have to hold inventory for a period longer than the payment terms. This generates a cash outflow from operating activities which we expect to reverse in later periods. Additionally, during the warm weather months, which is our peak time of operations, we generally carry higher amounts of inventory to ensure high fill rates and customer satisfaction.

 

 

CREDIT AGREEMENT

 

The Company has a credit agreement (the “Facility”) with Bank of America, which includes the following significant terms:

 

 

The Facility includes a financial covenant which requires the Company to maintain a minimum debt service ratio of 1.0 to 1.0 as measured by the previous twelve month period then ended. The Company was in compliance with this covenant at September 2009.

 

The amount available for use on the Facility at any given time is subject to a number of factors including eligible accounts receivable and inventory balances that fluctuate day-to-day. Based on our collateral and loan limits as defined in the Facility agreement, the Company’s availability was approximately $30.1 million at September 2009

and the outstanding balance on the revolving portion of the Facility was $22.7 million. The resulting credit limit on the Facility at September 30, 2009 was $52.8 million.

 

At September 2009, the revolving portion of the Company’s Facility balance bore interest based on various short-term LIBOR rate elections made by the Company. These LIBOR interest rate elections had an average rate of 2.82% at September 2009.

 

During fiscal 2009, our peak borrowings under the Facility were $38.4 million and our average borrowings and average availability were $31.2 and $19.5 million, respectively. Our availability to borrow under the Facility generally decreases as inventory and accounts receivable levels go up because of the borrowing limitations that are placed on collateralized assets.

 

CROSS DEFAULT AND CO-TERMINUS PROVISIONS

 

The Company’s owned real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, and certain warehouse equipment in the Rapid City, SD warehouse is financed through term loans with Marshall and Ilsley Bank (“M&I”), which is also a participant lender on the Company’s revolving line of credit. The M&I loans contain cross default provisions which cause all loans with M&I to be considered in default if any one of the loans where M&I is a lender, including the revolving credit facility, is in default. In addition, the M&I loans contain co-terminus provisions which require all loans with M&I to be paid in full if any of the loans are paid in full prior to the end of their specified terms.

 

REDEMPTION OF SERIES C CONVERTIBLE PREFERRED STOCK

 

In February 2009, the holder of the Company’s Series C Convertible Preferred Stock (“Series C”) redeemed all 80,000 shares of the issuance. The Series C issuance had been outstanding since 2006, paid a dividend of 6.00% per annum, and was convertible into 146,842 shares of common stock. The Company paid the liquidation value, or $2.0 million, plus accumulated and unpaid dividends to fully redeem all of the outstanding shares. The redemption was funded by our credit facility and satisfied all of the Company’s obligations under the Series C Convertible Preferred Stock Agreement.

 

DIVIDEND PAYMENTS

 

The Company paid cash dividends of $228,242, or $0.40 per common share, in fiscal 2009, and $90,970 or $0.16 per common share, in fiscal 2008.

 

During fiscal 2009, the Company had Series A, B, and C Convertible Preferred Stock (“Convertible Preferred Stock”) outstanding. In February 2009, the Series C Convertible Preferred Stock was fully redeemed at the election of the holder. The Company paid cash dividends related to the Convertible Preferred Stock of $347,025 and $419,839, respectively, during fiscal 2009 and fiscal 2008.

 

OTHER

 

The Company has several capital leases for office and warehouse equipment. At September 2009, the outstanding balances on the capital leases totaled approximately $0.2 million.

 

The Company has issued a letter of credit for $0.5 million to its workers’ compensation insurance carrier as part of its self-insured loss control program.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company does not have any off-balance sheet arrangements.

 

LIQUIDITY RISK

 

The Company’s liquidity position is significantly influenced by its ability to maintain sufficient levels of working capital. For our Company and industry in general, customer credit risk and ongoing access to bank credit heavily influence liquidity positions.

The Company’s credit facility with Bank of America expires in June 2011. We believe the Company continues to have a strong working relationship with that financial institution and has maintained compliance with all related debt covenants. The Company also aggressively monitors its customer credit risk to limit exposure in that area.

 

The Company does not currently hedge its exposure to interest rate risk or fuel costs. Accordingly, significant price movements in these areas can and do impact the Company’s profitability.

 

The Company believes its liquidity position going forward will be adequate to sustain operations. However, a precipitous change in market conditions or a further deterioration in economic conditions could materially impact the Company’s future revenue stream as well as its ability to collect on customer accounts receivable balances and to secure bank credit.

 

OTHER MATTERS — Critical Accounting Estimates

 

GENERAL

 

The Consolidated Financial Statements of the Company are prepared in accordance with U.S. generally accepted accounting principles, which require the Company to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.

 

The Company believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates are set forth below and have not changed during fiscal 2009.

 

ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

NATURE OF ESTIMATES REQUIRED.  The allowance for doubtful accounts represents our estimate of uncollectible accounts receivable at the balance sheet date. We monitor our credit exposure on a daily basis and regularly assess the adequacy of our allowance for doubtful accounts. Because credit losses can vary significantly over time, estimating the required allowance requires a number of assumptions that are uncertain.

 

ASSUMPTIONS AND APPROACH USED.  We estimate our required allowance for doubtful accounts using the following key assumptions.

 

 

INVENTORIES

 

NATURE OF ESTIMATES REQUIRED.  In our businesses, we carry large quantities and dollar amounts of inventory. Inventories primarily consist of finished products purchased in bulk quantities to be sold to our customers. Given the large quantities and broad range of products we carry, there is a risk that inventory may become impaired because it has become unsaleable or unrefundable, slow moving, obsolete, or because it has been discontinued. The use of estimates is required in determining the salvage value of this inventory.

ASSUMPTIONS AND APPROACH USED.  We estimate our inventory obsolescence reserve at each balance sheet date based on the following criteria:

 

 

DEPRECIATION, AMORTIZATION AND IMPAIRMENT OF LONG-LIVED ASSETS

 

Long-lived assets consist primarily of fixed assets and intangible assets that were acquired in business combinations. Fixed assets and amortizable identified intangible assets are assigned useful lives ranging from 2 to 40 years. Goodwill is not amortized. Impairment of segment reporting units is measured in the Company’s fourth fiscal quarter. The reporting units are valued using after-tax cash flows from operations (less capital expenditures) discounted to present value. The Company recorded no impairment charges in either fiscal 2009 or fiscal 2008.

 

NATURE OF ESTIMATES REQUIRED.  Management has to estimate the useful lives of the Company’s long lived assets. In regard to the Company’s impairment analysis, the most significant assumptions include management’s estimate of the annual growth rate used to project future sales and expenses.

 

ASSUMPTIONS AND APPROACH USED.  For fixed assets, depreciable lives are based on our accounting policy which is intended to mirror the expected useful life of the asset. In determining the estimated useful life of amortizable intangible assets, such as customer lists, we rely on our historical experience to estimate the useful life of the applicable asset and consider Industry norms as a benchmark. In evaluating potential impairment of long-lived assets, we primarily use an income based approach (discounted cash flow method) in addition to both public and private company information. A discounted cash flow methodology requires estimation in (i) forecasting future earnings (ii) determining the discount rate applicable to the earnings stream being discounted, and (iii) computing a terminal value at some point in the future.

 

The forecast of future earnings is an estimate of future financial performance based on current year results and management’s evaluation of the market potential for growth. The discount rate is a weighted average cost of capital using a targeted debt-to-equity ratio using the Industry average under the assumption that it represents our optimal capital structure and can be achieved in a reasonable time period. The terminal value is determined using a commonly accepted growth model.

 

INSURANCE

 

The Company’s insurance for workers’ compensation, general liability and employee-related health care benefits are provided through high-deductible or self-insured programs. As a result, the Company accrues for its workers’ compensation liability based upon claim reserves established with the assistance of a third-party administrator, which are then trended and developed. The reserves are evaluated at the end of each reporting period. Due to the uncertainty involved with the realization of claims incurred but unreported, management is required to make estimates of these claims.

 

ASSUMPTIONS AND APPROACH USED.  In order to estimate our reserve for incurred but unreported claims we consider the following key factors:

 

Employee Health Insurance Claims

 

 

Workers’ Compensation Insurance Claims

 

 

INCOME TAXES

 

The Company accounts for its income taxes by recording taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. These expected future tax consequences are measured based on provisions of tax law as currently enacted; the effects of future changes in tax laws are not anticipated. Future tax law changes, such as a change in the corporate tax rate, could have a material impact on our financial condition or results of operations.

 

On a periodic basis, we assess the likelihood that our deferred tax assets will be recovered from future taxable income and establish a related valuation allowance as appropriate. In performing our evaluation, we consider all available evidence, both positive and negative, to determine whether, based on the weight of the evidence, a valuation allowance is needed. Evidence used includes information about our current financial position and our results of operations for the current and preceding years, as well as all currently available information about future years, including our anticipated future performance, the reversal of deferred tax liabilities and tax planning strategies. When appropriate, we record a valuation allowance against deferred tax assets to offset future tax benefits that may not be realized.

 

ASSUMPTIONS AND APPROACH USED.  In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based in part upon management’s judgments regarding future events.

 

In making that estimate we consider the following key factors:

 

 

REVENUE RECOGNITION

 

We recognize revenue in our wholesale segment when products are delivered to customers (which generally is the same day products are shipped) and in our retail health food segment when products are sold to consumers. Sales are shown net of returns, discounts, and sales incentives to customers.

 

NATURE OF ESTIMATES REQUIRED.  We estimate and reserve for anticipated sales discounts. We also estimate and provide a reserve for anticipated sales incentives to customers when earned under established program requirements.

 

ASSUMPTIONS AND APPROACH USED.  We estimate the sales reserves using the following criteria:

 

 

Our estimates and assumptions for each of the aforementioned critical accounting estimates have not changed materially during the periods presented, nor are we aware of any reasons that they would be reasonably likely to change in the future.

 

Recently Issued Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement, which the Company adopted during the fourth fiscal quarter of 2009, modified Generally Accepted Accounting Principles (“GAAP”) hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification (“FASB ASC”), also known collectively as the “Codification,” is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. In accordance with this statement, all accounting references in these financial statements have been updated, and therefore SFAS references have been replaced with FASB ASC references.

 

The Company is currently evaluating the impact of implementing the following new accounting standards:

 

FASB ASC 860 (“Accounting for Transfers of Financial Assets”) – requires additional disclosures regarding the transfer and derecognition of financial assets and eliminates the concept of qualifying special-purpose entities. This pronouncement is effective for fiscal years beginning after November 15, 2009 (fiscal 2011 for the Company).

 

FASB ASC 810 (“Amendments to FASB Interpretation: Consolidation of Variable Interest Entities”) – eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. Additionally, this pronouncement requires additional disclosures about an enterprise’s involvement in variable interest entities and is effective for fiscal periods beginning after November 15, 2009 (fiscal 2011 for the Company).

 

Accounting Standards Update No. 2009-05 (“ASU 2009-05”), (“Measuring Liabilities at Fair Value”) – provides amendments to FASB ASC Topic 820, “Fair Value Measurements and Disclosure” for the fair value measurement of liabilities and is effective for the first interim or annual period after the ASU’s issuance (fiscal 2010 for the Company).

 

FASB ASC 260-10 (“Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”) – provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption, companies are required to retrospectively adjust their earnings per share data (including any amounts related to interim periods, summaries of earnings, and selected financial data) to conform to this pronouncement. This pronouncement is effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company).

 

FASB ASC 350-30 (“Determination of the Useful Life of Intangible Assets”) – requires companies estimating the useful life of a recognized intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewal or extension. This pronouncement is effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company).

 

FASB ASC 820 (“Fair Value Measurements”) – delays the effective date of certain fair value measurements to fiscal years beginning after November 15, 2008 (fiscal 2010 for the Company) for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Assets and liabilities subject to this deferral include goodwill, intangible assets, and long-lived

assets measured at fair value for impairment assessments, and nonfinancial assets and liabilities initially measured at fair value in a business combination. The Company’s nonfinancial assets and liabilities were subject to this delay at September 2009.

 

FASB ASC 810 (transitional: ASC 810-10-65-1) (“Noncontrolling Interest in Consolidated Financial Statements”) – establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This pronouncement is effective for fiscal years beginning on or after December 15, 2008 (fiscal 2010 for the Company).

 

FASB ASC 805 (“Business Combinations – revised”) – establishes principles and requirements regarding how an acquirer in a business combination recognizes and measures the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree. This pronouncement is effective for fiscal years beginning on or after December 15, 2008 (fiscal 2010 for the Company).

 

FASB ASC 805-20 (“Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise From Contingencies”) – addresses application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This pronouncement is effective for assets or liabilities arising from contingencies in business combinations for fiscal years beginning on or after December 15, 2008 (fiscal 2010 for the Company).

 

FORWARD LOOKING STATEMENTS

 

This Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections, contains forward-looking statements that are subject to risks and uncertainties and which reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, company performance and financial results. Forward-looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words “future,” “position,” “anticipate(s),” “expect,” “believe(s),” “see,” “plan,” “further improve,” “outlook,” “should” or similar expressions. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. You should understand that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward-looking statements:

 

 

 

Changes in these factors could result in significantly different results. Consequently, future results may differ from management’s expectations. Moreover, past financial performance should not be considered a reliable indicator of future performance. Any forward-looking statement contained herein is made as of the date of this document. Except as required by law, the Company undertakes no obligation to publicly update or correct any of these forward-looking statements in the future to reflect changed assumptions, the occurrence of material events or changes in future operating results, financial conditions or business over time.

 

 

Not applicable.

 

 

To the Board of Directors
AMCON Distributing Company
Omaha, Nebraska

 

We have audited the consolidated balance sheets of AMCON Distributing Company and subsidiaries as of September 30, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AMCON Distributing Company and subsidiaries as of September 30, 2009 and 2008, and the results of their operations and their cash flows for the years ended September 30, 2009 and 2008, in conformity with U.S. generally accepted accounting principles.

 

We were not engaged to examine management’s assessment of the effectiveness of AMCON Distributing Company’s internal control over financial reporting as of September 30, 2009, included in the accompanying Management’s Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.

 

 

Omaha, Nebraska

November 6, 2009

AMCON Distributing Company and Subsidiaries

 

CONSOLIDATED BALANCE SHEETS

 

 

The accompanying notes are an integral part of these consolidated financial statements.

AMCON Distributing Company and Subsidiaries

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

The accompanying notes are an integral part of these consolidated financial statements.

AMCON Distributing Company and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

AMCON Distributing Company and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

(a) Company Operations:

 

AMCON Distributing Company and Subsidiaries (“AMCON” and “the Company”) is primarily engaged in the wholesale distribution of consumer products in the Central and Rocky Mountain regions of the United States. In addition, the Company operates thirteen retail health food stores in Florida and the Midwest.

 

AMCON’s wholesale distribution business (“ADC”) includes five distribution centers that sell approximately 14,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilled products and institutional food service products. The Company distributes products primarily to retailers such as convenience stores, discount and general merchandise stores, grocery stores, drug stores, and gas stations. In addition, the Company services institutional customers, including restaurants and bars, schools, sports complexes, as well as other wholesalers.

 

AMCON also operates six retail health food stores in Florida under the name Chamberlin’s Market & Café (“Chamberlin’s”) and seven in the Midwest under the name Akin’s Natural Foods Market (“Akin’s”). These stores carry natural supplements, groceries, health and beauty care products and other food items.

 

The Company’s operations are subject to a number of factors which are beyond the control of management, such as changes in manufacturers’ cigarette pricing, state excise tax increases, or the opening of competing retail stores in close proximity to the Company’s retail stores. While the Company sells a diversified product line, it remains dependent upon cigarette sales which represented approximately 71% of revenue and 27% of gross profit in fiscal 2009 and 70% of revenue and 22% of gross profit in fiscal 2008.

 

(b) Accounting Period:

 

The Company’s fiscal year ends on September 30 and the fiscal years ended September 30, 2009 and September 30, 2008 have been included herein.

 

(c) Principles of Consolidation and Basis of Presentation:

 

The Consolidated Financial Statements include the accounts of AMCON and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

(d) Cash and Accounts Payable:

 

AMCON utilizes a cash management system under which an overdraft is the normal book balance in the primary disbursing accounts. Overdrafts included in accounts payable at fiscal 2009 and fiscal 2008 totaled approximately $1.2 million and $1.9 million, respectively, and reflect checks drawn on the disbursing accounts that have been issued but have not yet cleared through the banking system. The Company’s policy has been to fund these outstanding checks as they clear with borrowings under its revolving credit facility (see Note 8). These outstanding checks (book overdrafts) are classified as cash flows from operating activities in the Consolidated Statements of Cash Flows.

 

(e) Accounts Receivable:

 

Accounts receivable consist primarily of amounts due to the Company from its normal business activities. An allowance for doubtful accounts is maintained to reflect the expected uncollectibility of accounts receivable based on past collection history, evaluation of impact of economic conditions on our customers, and specific risks identified in the portfolio. The Company determines the past due status of trade receivables based on contractual terms with each customer.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

(f) Inventories:

 

Inventories consisted of finished goods at September 2009 and 2008 and are stated at the lower of cost, determined on a FIFO basis, or market. The wholesale distribution and retail health food segment inventories consist of finished products purchased in bulk quantities to be redistributed to the Company’s customers or sold at retail. Finished goods include total reserves of approximately $0.9 million and $0.6 million at September 2009 and September 2008, respectively. These reserves include the Company’s obsolescence allowance, which reflects estimated unsaleable or non-refundable inventory based upon an evaluation of slow moving and discontinued products.

 

(g) Prepaid Expenses and Other Current Assets:

 

 

 

Prepaid inventory represents inventory in-transit that has been paid for but not received.

 

(h) Property and Equipment:

 

Property and equipment are stated at cost less accumulated depreciation or amortization. Major renewals and improvements are capitalized and charged to expense over their useful lives through depreciation or amortization charges. Repairs and maintenance are charged to expense in the period incurred. The straight-line method of depreciation is used to depreciate assets over the estimated useful lives as follows:

 

 

Costs and accumulated depreciation applicable to assets retired or sold are eliminated from the accounts, and the resulting gains or losses are reported as a component of operating income. Amortization expense related to capital leases has been included as a component of depreciation expense in the statement of operations.

 

(i) Long-Lived Assets:

 

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Long-lived assets are reviewed annually during our fourth fiscal quarter for impairment and are reported at the lower of the carrying amount or fair value less the cost to sell. The Company recorded no impairment charges in either fiscal 2009 or fiscal 2008.

 

(j) Goodwill, Intangible and Other Assets:

 

Goodwill consists of the excess purchase price paid in business acquisitions over the fair value of assets acquired. At September 2009, intangible assets consisted of tradenames assumed in acquisitions and other assets primarily consisted of the cash surrender value of life insurance policies.

 

The Company employs the non-amortization approach to account for purchased goodwill and intangible assets having indefinite useful lives. Under a non-amortization approach, goodwill and intangible assets having indefinite useful lives are not amortized into results of operations, but instead are reviewed at least annually for impairment.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company performs its annual impairment testing of goodwill and other intangible assets during the fourth fiscal quarter of each year. If the recorded value of goodwill and intangible assets having indefinite useful lives is determined to exceed their fair value, the asset is written down to its fair value and a charge is taken against the results of operations in that period. AMCON considers its tradenames to have indefinite lives. The Company did not record impairment charges related to goodwill or intangible assets during fiscal 2009 or fiscal 2008.

 

The benefit related to increases in the cash surrender value of split dollar life insurance policies are recorded as a reduction to insurance expense. The cash surrender value of life insurance policies is limited to the lesser of the cash value or premiums paid in accordance with regulatory guidance.

 

(k) Debt Issuance Costs:

 

The costs related to the issuance of debt are capitalized in other assets and amortized on an effective interest method to interest expense over the terms of the related debt agreements.

 

(l) Revenue Recognition:

 

AMCON recognizes revenue when title passes to our customers. In our wholesale distribution segment, this occurs when products are delivered to customers (which generally is the same day products are shipped) and in our retail health food segment when products are sold to consumers. Sales are shown net of returns and discounts.

 

(m) Insurance:

 

The Company’s workers’ compensation, general liability, and employee-related health care benefits are provided through high-deductible or self-insurance programs. As a result, the Company accrues for its workers’ compensation and general liability based upon a claim reserve analysis. The Company has issued a letter of credit in the amount of $0.5 million to its workers’ compensation insurance carrier as part of its loss control program. The reserve for incurred, but not reported, employee health care benefits is based on approximately one month of claims, calculated using the Company’s historical claims experience rate, plus specific reserves for large claims. The reserves associated with the exposure to these liabilities are reviewed by management for adequacy at the end of each reporting period.

 

(n) Income Taxes:

 

The Company uses the asset and liability method to calculate deferred income taxes. Deferred tax assets and liabilities are recognized on temporary differences between financial statement and tax bases of assets and liabilities using enacted tax rates. The effect of tax rate changes on deferred tax assets and liabilities is recognized in income during the period that includes the enactment date.

 

(o) Stock-Based Compensation:

 

The Company recognizes expense for its share-based compensation based on the fair value of the awards that are granted. The fair value of the stock options is estimated at the date of grant using the Black-Scholes option pricing model. Option pricing methods require the input of highly subjective assumptions, including the expected stock price volatility. The fair value of restricted stock awards is based on the Company’s stock price on the date of grant. Measured compensation cost is recognized ratably over the vesting period of the related share-based compensation award and is reflected in our Consolidated Statement of Operations under “selling, general and administrative expenses.”

 

(p) Customer Sales Incentives:

 

The Company provides sales rebates or discounts to customers. These incentives are recorded as a reduction of sales revenue as earned by the customer.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

(q) Per-share results:

 

Basic earnings or loss per share data are based on the weighted-average number of common shares outstanding during each period. Diluted earnings or loss per share data are based on the weighted-average number of common shares outstanding and the effect of all dilutive potential common shares including stock options and conversion features of the Company’s preferred stock issuances.

 

(r) Use of Estimates:

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

(s) Recently Issued Accounting Standards:

 

The Company is currently evaluating the impact of implementing the following new accounting standards:

 

FASB ASC 860 (“Accounting for Transfers of Financial Assets”) – requires additional disclosures regarding the transfer and derecognition of financial assets and eliminates the concept of qualifying special-purpose entities. This pronouncement is effective for fiscal years beginning after November 15, 2009 (fiscal 2011 for the Company).

 

FASB ASC 810 (“Amendments to FASB Interpretation:  Consolidation of Variable Interest Entities”) – eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. Additionally, this pronouncement requires additional disclosures about an enterprise’s involvement in variable interest entities and is effective for fiscal periods beginning after November 15, 2009 (fiscal 2011 for the Company).

 

Accounting Standards Update No. 2009-05 (“ASU 2009-05”), (“Measuring Liabilities at Fair Value”) – provides amendments to FASB ASC Topic 820, “Fair Value Measurements and Disclosure” for the fair value measurement of liabilities and is effective for the first interim or annual period after the ASU’s issuance (fiscal 2010 for the Company).

 

FASB ASC 260-10 (“Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”) – provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption, companies are required to retrospectively adjust their earnings per share data (including any amounts related to interim periods, summaries of earnings, and selected financial data) to conform to this pronouncement. This pronouncement is effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company).

 

FASB ASC 350-30 (“Determination of the Useful Life of Intangible Assets”) – requires companies estimating the useful life of a recognized intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewal or extension. This pronouncement is effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company).

 

FASB ASC 820 (“Fair Value Measurements”) – delays the effective date of certain fair value measurements to fiscal years beginning after November 15, 2008 (fiscal 2010 for the Company) for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Assets and liabilities subject to this deferral include goodwill, intangible assets, and long-lived assets measured at fair value for impairment assessments, and nonfinancial assets and liabilities initially measured

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

at fair value in a business combination. The Company’s nonfinancial assets and liabilities were subject to this delay at September 2009.

 

FASB ASC 810 (transitional: ASC 810-10-65-1) (“Noncontrolling Interest in Consolidated Financial Statements”) – establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This pronouncement is effective for fiscal years beginning on or after December 15, 2008 (fiscal 2010 for the Company).

 

FASB ASC 805 (“Business Combinations – revised”) – establishes principles and requirements regarding how an acquirer in a business combination recognizes and measures the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree. This pronouncement is effective for fiscal years beginning on or after December 15, 2008 (fiscal 2010 for the Company).

 

FASB ASC 805-20 (“Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise From Contingencies”) – addresses application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This pronouncement is effective for assets or liabilities arising from contingencies in business combinations for fiscal years beginning on or after December 15, 2008 (fiscal 2010 for the Company).

 

 

In May 2009, Trinity Springs, Inc. (“TSI”), a wholly owned subsidiary and former component of the Company’s beverage segment, and Crystal Paradise Holdings, Inc. (“CPH”) closed a transaction whereby CPH exchanged a $5.0 million note receivable (plus $0.1 million of accrued interest) which it held and was due from TSI, for the operating assets of TSI. The Company will have no continuing involvement in the related operating assets and has recorded a $4.7 million pre-tax gain ($3.0 million after tax) in conjunction with the transaction, which included the recognition of a $1.5 million deferred gain attributable to a previously executed Mutual Release and Settlement Agreement between AMCON, TSI, and CPH. The $4.7 million gain has been reflected in the Statement of Operations as a component of discontinued operations.

 

Simultaneous with the closing of the CPH transaction discussed above, the Company fully settled and satisfied $2.7 million in related party notes payable and accrued interest totaling $0.8 million due from TSI, in exchange for cash payments of approximately $0.8 million. The Company has recorded a $2.7 million pre-tax gain ($1.7 million after tax) related to this transaction, which has been reflected in the Statements of Operations as a component of discontinued operations.

 

A summary of discontinued operations is as follows (dollars in millions):

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The carrying amounts of the major classes of assets and liabilities included in discontinued operations at September 2009 and 2008 are as follows (in millions):

 

 

 

The Company has two convertible preferred stock series outstanding at September 2009 as identified in the following table:

 

 

The Series A Convertible Preferred Stock (“Series A”) and Series B Convertible Preferred Stock (“Series B”), collectively (the Preferred Stock), are convertible at any time by the holders into a number of shares of AMCON common stock equal to the number of preferred shares being converted times a fraction equal to $25.00 divided by the conversion price. The conversion prices for the Preferred Stock are subject to customary adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock. Cumulative dividends for the Preferred Stock are payable in arrears, when, and if declared by the Board of Directors, on March 31, June 30, September 30 and December 31 of each year.

 

In the event of a liquidation of the Company, the holders of the Preferred Stock are entitled to receive the liquidation preference plus any accrued and unpaid dividends prior to the distribution of any amount to the holders of the Common Stock.

 

The shares of Preferred Stock are optionally redeemable by the Company beginning on various dates, as listed in the above table, at redemption prices equal to 112% of the liquidation preference. The redemption prices decrease 1% annually thereafter until the redemption price equals the liquidation preference, after which date it remains the liquidation preference. The Preferred Stock is redeemable at the liquidation value and at the option of the holder. The Series A Preferred Stock is owned by Mr. Chris Atayan, AMCON’s Chief Executive Officer and Chairman of the Board. The Series B Preferred Stock is owned by an institutional investor which has elected Mr. Atayan, pursuant to the voting rights in the Certificate of Designation creating the Series B, as its representative.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

In February 2009, the holder of the Company’s Series C Convertible Preferred Stock (“Series C”) redeemed all 80,000 shares of the issuance. The Series C issuance had been outstanding since 2006, paid a dividend of 6.00% percent per annum, and was convertible into 146,842 shares of common stock. The Company paid the liquidation value, or $2.0 million, plus accumulated and unpaid dividends to fully redeem all of the outstanding shares. The redemption was funded through borrowings on our credit facility and satisfied all of the Company’s obligations under the Series C Convertible Preferred Stock Agreement.

 

 

Basic earnings (loss) per share available to common shareholders is calculated by dividing income (loss) from continuing operations less preferred stock dividend requirements and income (loss) from discontinued operations by the weighted average common shares outstanding for each period. Diluted earnings (loss) per share available to common shareholders is calculated by dividing income (loss) from continuing operations less preferred stock dividend requirements (when anti-dilutive) and income (loss) from discontinued operations by the sum of the weighted average common shares outstanding and the weighted average dilutive options, using the treasury stock method.

 

Stock options and potential common stock outstanding at fiscal 2009 and fiscal 2008 that were anti-dilutive were not included in the computations of diluted earnings per share. Such potential common shares totaled 1,956 and 12,279 in fiscal 2009 and fiscal 2008, respectively. The average exercise price of anti-dilutive options and potential common stock was $34.50 and $44.09, in fiscal 2009 and fiscal 2008, respectively.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

 

 

Property and equipment at September 2009 and 2008 consisted of the following:

 

 

 

Goodwill by reporting segment at fiscal year ends 2009 and 2008 was as follows:

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Other intangible assets at fiscal year ends 2009 and 2008 consisted of the following:

 

 

Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. The Company performs its annual impairment testing of goodwill and other intangible assets during the fourth fiscal quarter of each year. This review identified no impairments in fiscal 2009 or fiscal 2008.

 

 

Other assets at fiscal year ends 2009 and 2008 consisted of the following:

 

 

 

The Company primarily finances its operations through a credit facility agreement with Bank of America (the “Facility”) and long-term debt agreements with banks.

 

CREDIT FACILITY

 

The Facility consisted of the following at fiscal 2009 and 2008: